Forisk Blog

Forest Finance: Aunt Fanny Asks About Cash Flow

After measuring the diameter of the pine tree, Aunt Fanny handed the D-tape back to me. I returned her Cross pen and black-and-white marbled composition notebook. She opened the notebook and wrote down a few things.

“Nephew, tell me more about how my forest generates cash. Isn’t it just about getting higher prices for the trees we’re growing?”

“There’s a little more to it, Aunt Fanny.”

“Always is,” she said, smiling.

“Let’s talk about what our cash flows look like and where they come from.”

“This is not a beauty pageant, Nephew. All incoming cash flows look good to me. They don’t need to be from Brazil in a bikini.”

“Right. Well, first, income from harvesting your forest is periodic. We don’t cut trees every quarter or every year for smaller properties. If you owned thousands of acres, we might have enough different age classes where we’d cut and sell some trees somewhere on the property each year. But not in this case.”

“So when do we cut trees for sale?”

“Typically, we’ll do a thinning when the trees are between 15 and 18 years old, and we’ll do a final harvest, a clear cut, between age 25 and 30, depending on the trees, on the market and on your financial needs.”

“Then we replant and grow a new forest?”

“Right. We do have to spend money to replant, so we take some of that income and reinvest it into the forest.”

“Makes sense.”

“Second, those cash flows from harvesting are diversified. We’ll be selling different products, such as pulpwood logs to pulp mills and sawlogs to sawmills, and we’ll be selling different species, like pine and hardwoods.”

“Never liked all my eggs in one basket. Sounds good, Nephew.”

“Third, the forest also generates smaller, more regular cash flows from things like hunting leases or harvesting pine straw.”

“It sounds like the cash flow from the final harvest is pretty important. Break it down for me, Nephew.”

“Yes, Ma’am, that’s right. Cash flow comes mostly from the price of the forest products you’re growing times the volume of each product harvested.”

“Makes sense. Like farming. Price X times my bushels of corn and price Y times my bales of hay.”

“Right. Except in forestry, our volume, the amount and type of forest products we grow changes over time. Forest management improves and mills change what they want. Technology in action.”

“Well, that’s not much different than farming, Nephew, is it? Technology changes all of the time.”

“That’s true, except with farming you can adjust each year. In forestry, we’re making decisions today for trees we’ll harvest in 15 or 25 years.”

“It depends. Here, we have some mature timber that we could harvest today. But if you’re starting fresh, yes, we’re planting a ‘business’ that produces its biggest cash flows in the future,” I said. “A friend of mine, another forester, always says ‘in forestry, we’re in the delayed gratification business’.”

Click here to learn about and register for “Applied Forest Finance” on February 3rd in Atlanta, Georgia. The course details necessary skills and common errors associated with the financial analysis of timberland and other forestry-related investments. This includes discussion related to the composition and estimating of future cash flows